A model system for the transformation of epithelial cells has been developed. The system uses a mouse epidermal keratinocyte cell line, designated BALB/MK, which is totally dependent on the presence of epidermal growth factor (EGF) for its continued proliferation. In addition, the cell line will terminally differentiate in the presence of high levels of extracellular calcium. Transformation of the cells by either chemical carcinogens or a variety of mammalian sarcoma viruses results in the abrogation of the dependence on EGF as well as a block in calcium-induced terminal differentiation. Furthermore, different sarcoma viruses block terminal differentiation at different steps in the pathway. The recent findings that certain human tumors of epithelial origin contain activated onc genes similar to those found in mammalian sarcoma viruses emphasize the importance of this transformation system.